Valuation of Church & Dwight Co. stock (NYSE:CHD)

CHD sells a wide range of consumer products such as Arm & Hammer Baking Soda, Oxiclean,

and Pepsodent. This company has had a somewhat rapid growth path resulting from

acquisitions of companies to diversify its consumer product lines. An analyst has researched

CHD to develop inputs for a two-stage dividend discount model to estimate CHDs intrinsic

value and has put together the information below on annual dividends per share and

earnings per share.

1. Above is financial data for CHD on dividends per share from 2012 to 2020. Calculate

annual growth rates for DPS and convert to an average annual DPS growth rate.

2. Calculate the annual dividend payout ratios (i.e. DPS/EPS) and take an average.

3. From your results in a and b above, briefly discuss the prospects for CHDs future growth

potential. (Hint: Relate the payout ratios to the concept of sustainable growth.)

4. Based on this research, the analyst believes that a two-stage dividend discount model is

appropriate to estimate the intrinsic value of CHDs stock. The inputs will be based on a

required return (i.e. R) range of 6% to 6.5% for the stock, 2020 as the initial DPS,

supernormal growth stage (i.e. g1) for the next five years using the historical average

growth rate of DPS, and a dividend growth rate of 4.5% per year for the constant growth

phase (i.e. g2). Replicate this model to generate a fair range of stock value.

5. The analyst is also reviewing trends in profitability using earnings per share. However,

2017 tax reform distorted company earnings in 2017 and 2018. Furthermore, EPS in

2020 for CHD is higher than normal because this consumer products companys sales

has benefitted (unusually) from the covid environment. As a result the analyst has done

research to normalize EPS, and has reviewed industry fundamentals to determine PE

multiples based on peer companies. The analyst believes that for valuation purposes,

normalized EPS is $2.80 per share and the going forward PE multiple should be about

25x. Translate this into an intrinsic value of the stock.

6. You have now framed reasonable ranges for CHD stock intrinsic value for required

returns ranging from 6% to 6.5% in a two-stage dividend discount model, and using a

market multiple (i.e. PE). From Yahoo Finance or any other source, find CHDs current

trading price. Briefly discuss your range of intrinsic values, whether you believe your

methodologies fairly represent CHDs value, and make a recommendation to buy, hold,

or sell the stock.